Chapter 16 Final Review

What is the multiplier formula?

1/(1-MPC)

If the marginal propensity to consume equals 0.90​, the tax rate equals 0.20​, what is the value of the government purchases​ multiplier?

3.57

The simple multiplier effect shows the resulting change in real GDP due to an increase in government purchases or a decrease in taxes assuming that the price level is

Constant

One-time tax​ rebates, such as those in 2001 and​ 2008, increase consumption spending by less than a permanent tax cut because​ one-time tax rebates increase

Current income

The multiplier effect is only a consideration for increases in government purchases. True or False

False

What is the difference between federal government purchases​ (spending) and federal government​ expenditures?

Government purchases are included in government expenditures.

Each year that the federal government runs a​ deficit, the federal debt

Grows

What is crowding out?

Increased government spending leads to borrowing more which means interest rates go up and this leads to a decrease in investment when an increase in government spending decreases a component of GDP (most likely investment)

As a​ result, when AD shifts to the​ right, in reality the change in real GDP will be ________ it would be if the price level were constant.

Less than

According to the multiplier effect​, an initial decrease in government purchases decreases real GDP by ___________ the initial decrease in government purchases.

More than

After September​ 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal​ policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

In the long​ run, increases in government purchases result in

Partial crowding out

What are the gains to be had from simplifying the tax​ code?

Resources from the tax preparation industry freed up for other endeavors. Increased efficiency of households and firms. Greater clarity of the decisions made by households and firms.

Each year that the federal government runs a​ surplus, the federal debt

Shrinks

The higher the tax​ rate, the __________ the multiplier effect.

Smaller

Policy that is specifically designed to affect aggregate supply and increase incentives to​ work, save, and start a​ business, by reducing the tax wedge LOADING... is called

Supply-side economics

In​ reality, the SRAS is

Upward sloping

When is it considered​ "good policy" for the government to run a budget​ deficit?

When borrowing is used for​ long-lived capital goods.

Does government spending ever reduce private​ spending?

​Yes, due to crowding out.